Pursuant to the discussion paper on delisting of equity shares floated by the Securities and Exchange Board of India (SEBI) on July 26, 2018, SEBI has recently amended the Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 (Delisting Regulations) and has accordingly notified the Securities and Exchange Board of India (Delisting of Equity Shares) (Second Amendment) Regulations, 2018 (Amended Delisting Regulations) on November 14, 2018. The aim of the amendment is to plug loopholes in the delisting process considering the interests of the promoters/acquirers and public shareholders.
Though the Amended Delisting Regulations have made several amendments to the Delisting Regulations, the most crucial include:
- Inclusion of a provision for the acquirer / promoter to make a counter offer if the price discovered under the reverse book building process (RBB) is not acceptable to them.
- Clarification as to the reference date for computing the floor price.
The Amended Delisting Regulations have introduced the concept of ‘counter offer’ wherein if the acquirer / promoter is not satisfied with the price discovered under the RBB process, then such acquirer / promoter may make a counter offer to the public shareholders.
The counter offer has to be made within two working days of the discovery of the price and should not be less than the book value of the company as certified by the merchant banker. The counter offer shall be deemed to be successful only if the post offer promoter shareholding (along with the persons acting in concert with the promoter) taken together with the shares accepted at the counter offer price reaches 90 per cent of the total issued shares of that class (excluding the shares that are held by a custodian and against which depository receipts have been issued overseas).
Prior to the amendment, the acquirer / promoter could have either (a) accepted a price equal to or more than the discovered price or (b) rejected the offer price in which case the entire delisting exercise would become futile.
There have been instances wherein the pricing in the RBB process is influenced by certain groups of shareholders quoting unreasonably high prices that the acquirer / promoter may not agree, thus blocking the delisting process and jeopardising the interests of the small shareholders. SEBI has taken into consideration that there could be a situation wherein the acquirer / promoter quotes a revised price (instead of outright rejecting the offer price) and the other shareholders are willing to sell their shares at such revised price, thus still achieving the 90 per cent threshold and making the delisting process a success.
Though the concept of counter offer has been introduced, the detailed process for the same is yet to be notified by SEBI.
Another major amendment is that a clarification has now been included in the Amended Delisting Regulations that the reference date for computing the floor price would be the date on which the recognised stock exchange(s) were required to be notified of the board meeting in which the delisting proposal would be considered. At present, the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015, require a listed company to notify the stock exchange of a board meeting in which the proposal for a voluntary delisting is to be considered at least two working days prior to such meeting (excluding the date of intimation and the date of meeting).
Prior to the amendment, the Delisting Regulations provided that the offer price shall be determined through the book building process after fixing the floor price which shall be determined as per the Securities and Exchange Board of India (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (SAST Regulations). Under the SAST Regulations the period for computing the floor price commences from the date of the public announcement. The latest amendment tries to ensure that the floor price is not inflated by market speculations. As soon as information of delisting is received in the market, the price shoots up unreasonably – consequently a longer time gap between the date of intimation to the stock exchange and the date of the public announcement increases the floor price computation, thereby affecting the price discovery. The current move to determine floor price based on a reference date that is prior to the date when the stock exchange is intimated of the proposed delisting ensures that the floor price is based on the prevailing stock prices and not market speculations.
The other amendments to the Delisting Regulations include:
- In cases of compulsory delisting,
- A three month timeline from the date of delisting for the acquirer / promoter to acquire the delisted equity shares from the public shareholders by paying them the value determined by the valuer.
- Where the fair value of the company is positive, a restriction on effecting transfer, by way of sale, pledge, etc., of any of the equity shares held by the promoters / promoter group, freezing of corporate benefits like dividend, rights, bonus shares, split, etc. for all the equity shares held by the promoters/ promoter group and non-eligibility of promoters and whole-time directors to become directors of any listed company, till the promoters of such company provide an exit option to the public shareholders. Permission to maintain an interest bearing account for the cash component of an escrow account.
- Though clarity on the counter-offer mechanism offer is still awaited, the Amended Delisting Regulations is a welcome move for promoters/acquirers and public shareholders.